QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
to

Commission file number 001-10962

Callaway Golf
Company

(Exact name of registrant as specified in its charter)

Delaware

95-3797580

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2180 Rutherford Road, Carlsbad, CA 92008

(760) 931-1771

(Address, including zip code, and telephone number, including area code, of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨ (Do not check
if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x

The number of shares outstanding of the Registrants Common Stock, $.01 par value, as of March 31, 2010 was 64,391,104.

Important Notice to Investors: Statements made in this report that relate to
future plans, events, liquidity, financial results or performance including statements relating to future cash flows and liquidity, as well as estimated unrecognized stock compensation expense, computation of the annual estimated effective tax rate
at each interim period, projected capital expenditures, future contractual obligations and the recovery of the Companys business in 2010 are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.
These statements are based upon current information and expectations. Actual results may differ materially from those anticipated if the information on which those estimates was based ultimately proves to be incorrect or as a result of certain risks
and uncertainties, including changes in economic conditions, credit markets, or foreign currency exchange rates, the level of promotional activity in the marketplace, consumer acceptance and demand for the Companys products, future consumer
discretionary purchasing activity (which can be significantly adversely affected by unfavorable economic or market conditions), delays, difficulties, changed strategies, or unanticipated factors including those affecting the implementation of the
Companys global operations strategy, as well as the general risks and uncertainties applicable to the Company and its business. For details concerning these and other risks and uncertainties, see Part I, Item IA, Risk Factors of
our most recent Form 10-K as well as the Companys other reports subsequently filed with the Securities and Exchange Commission from time to time. Investors are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Except as required by law, the Company undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Investors should also be aware that while the Company from time to time does communicate with securities analysts, it is against the Companys policy to disclose to them any material non-public information or other confidential commercial
information. Furthermore, the Company has a policy against distributing or confirming financial forecasts or projections issued by analysts and any reports issued by such analysts are not the responsibility of the Company. Investors should not
assume that the Company agrees with any report issued by any analyst or with any statements, projections, forecasts or opinions contained in any such report.

The accompanying unaudited consolidated condensed financial statements have been prepared by Callaway Golf
Company (the Company or Callaway Golf) pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC. These consolidated condensed financial statements, in the opinion of
management, include all adjustments necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. Interim operating results are not necessarily indicative of operating
results for the full year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those estimates and assumptions.

Recently Adopted Accounting Standards

In December 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17, Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entitys purpose and design and the reporting entitys ability
to direct the activities of the other entity that most significantly impact the other entitys economic performance. The new standard requires a number of new disclosures, including additional disclosures about the reporting entitys
involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity is required to disclose how its involvement with a variable interest entity affects the reporting entitys
financial statements. ASU 2009-17 is effective at the start of a reporting entitys first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Based on the Companys evaluation of ASU
2009-17, the adoption of this statement did not impact the Companys consolidated financial statements.

2. Preferred Stock Offering

On June 15, 2009, the Company sold 1,400,000 shares of its 7.50% Series B Cumulative Perpetual Convertible Preferred
Stock, $0.01 par value (the preferred stock). The Company received gross proceeds of $140,000,000 and incurred costs of $6,031,000, which were recorded as an offset to additional paid-in capital in the consolidated condensed statement of
shareholders equity. The terms of the preferred stock provide for a liquidation preference of $100 per share and cumulative dividends from the date of original issue at a rate of 7.50% per annum (equal to an annual rate of $7.50 per
share), subject to adjustment in certain circumstances. As of March 31, 2010, the liquidation preference would have been $140,438,000. Dividends on the preferred stock are payable quarterly in arrears subject to declaration by the Board of
Directors and compliance with the Companys line of credit and applicable law.

The preferred stock is generally
convertible at any time at the holders option into common stock of the Company at an initial conversion rate of 14.1844 shares of Callaways common stock per share of preferred

stock, which is equivalent to an initial conversion price of approximately $7.05 per share. Based on the initial conversion rate, approximately 19,900,000 shares of common stock would be
issuable upon conversion of all of the outstanding shares of preferred stock.

The Company may also elect, on or prior to
June 15, 2012, to mandatorily convert some or all of the preferred stock into shares of the Companys common stock if the closing price of the Companys common stock has exceeded 150% of the conversion price for at least 20 of the 30
consecutive trading days ending the day before the Company sends the notice of mandatory conversion. If the Company elects to mandatorily convert any preferred stock, it will make an additional payment on the preferred stock equal to the aggregate
amount of dividends that would have accrued and become payable through and including June 15, 2012, less any dividends already paid on the preferred stock. As of March 31, 2010, this amount would have been $23,625,000.

On or after June 20, 2012, the Company, at its option, may redeem the preferred stock, in whole or in part, at a price equal to 100%
of the liquidation preference, plus all accrued and unpaid dividends. The preferred stock has no maturity date and has no voting rights prior to conversion into the Companys common stock, except in limited circumstances.

3. Earnings per Common Share

Earnings per common share, basic, is computed by dividing net income less preferred stock dividends (i.e., net income allocable to common
shareholders) by the weighted-average number of common shares outstanding for the period. Earnings per common share, diluted, is computed by dividing net income by the weighted-average number of common and potentially dilutive common equivalent
shares outstanding for the period. Weighted-average common shares outstandingdiluted is the same as weighted-average common shares outstandingbasic in periods when a net loss is reported, or in periods when diluted earnings (loss) per
share is more favorable than basic earnings (loss) per share.

Dilutive securities include the common stock equivalents of
convertible preferred stock, options granted pursuant to the Companys stock option plans, potential shares related to the Employee Stock Purchase Plan (ESPP) and outstanding restricted stock awards and units granted to employees
and non-employees (see Note 11). Dilutive securities are included in the calculation of diluted earnings per common share using the treasury stock method in accordance with Accounting Standards Codification (ASC) Topic 260,
Earnings per Share (ASC 260). Dilutive securities related to the ESPP are calculated by dividing the average withholdings during the period by 85% of the market value of the Companys common stock at the end of the
period.

In June 2009, the Company completed its offering of 1,400,000 shares of preferred stock. The preferred stock is
generally convertible into shares of common stock and earns cumulative dividends from the date of original issue at an initial rate of 7.50% per annum. In accordance with ASC 260, dividends on cumulative preferred stock are subtracted from net
income to calculate net income allocable to common shareholders in the basic earnings per share calculation. For the three months ended March 31, 2010, the Company paid $2,625,000 in dividends to preferred shareholders and accrued $438,000.

The following table summarizes the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock, and reconciles the weighted-average common shares used in the computation of basic and diluted earnings per share (in thousands, except per share data):

Three Months EndedMarch 31,

2010

2009

Earnings per common sharebasic

Numerator:

Net Income

$

20,303

$

6,812

Less: Preferred stock dividends

(2,625

)



Net Income allocable to common shareholders

$

17,678

$

6,812

Denominator:

Weighted-average common shares outstandingbasic

63,653

62,914

Basic earnings per common share

$

0.28

$

0.11

Earnings per common sharediluted

Numerator:

Net Income

$

20,303

$

6,812

Denominator:

Weighted-average common shares outstandingbasic

63,653

62,914

Preferred stock weighted-average shares outstanding

19,858



Options, restricted stock and other dilutive securities

415

406

Weighted-average common shares outstandingdiluted

83,926

63,320

Diluted earnings per common share

$

0.24

$

0.11

Options with an exercise price in excess of the
average market value of the Companys common stock during the period have been excluded from the calculation as their effect would be antidilutive. For the three months ended March 31, 2010 and 2009, options outstanding totaling
approximately 9,705,000 and 8,372,000 shares, respectively, were excluded from the calculations as their effect would have been antidilutive.

4. Income Taxes

The
Company calculates its interim income tax provision in accordance with ASC Topic 270, Interim Reporting and ASC Topic 740, Accounting for Income Taxes (ASC 740). At the end of each interim period,
the Company estimates the annual effective tax rate and applies that rate to its ordinary quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items is recognized in the interim period in which those items
occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change occurs.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment
including the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences as a result of differences between amounts measured and recognized in
accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur,
additional information is obtained or as the tax environment changes.

The Company is required to file federal and state tax returns in the United States and
various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the
Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal, state
and international taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by the Company (uncertain tax positions)
and therefore require the Company to pay additional taxes. As required under applicable accounting rules, the Company therefore accrues an amount for its estimate of additional tax liability, including interest and penalties, which the Company could
incur as a result of the ultimate resolution of the uncertain tax positions. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits,
expiration of statute of limitations, or upon occurrence of other events.

In accordance with ASC 740, the Company accrues for
the estimated additional amount of taxes for the uncertain tax positions if it is more likely than not that the Company would be required to pay additional taxes. An uncertain income tax position will not be recognized if it has less than 50%
likelihood of being sustained. The accrual for uncertain tax positions can result in a difference between the estimated benefit recorded in the Companys financial statements and the benefit taken or expected to be taken in the Companys
income tax returns. This difference is generally referred to as an unrecognized tax benefit.

As of March 31,
2010, the liability for income taxes associated with uncertain tax benefits was $11,355,000 and could be reduced by $6,758,000 of offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments (which was
recorded as a long-term income tax receivable) as well as $936,000 of tax benefits associated with state income taxes. The net amount of $3,661,000, if recognized, would affect the Companys financial statements and favorably affect the
Companys effective income tax rate. The Company expects that during the next twelve months it is reasonably possible that unrecognized tax benefit liabilities will decrease by approximately $1,276,000 ($34,000, net of correlative adjustments)
due to the expiration of various statutes of limitation and the resolution of various foreign, federal and state income tax matters.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For the quarter ended
March 31, 2010, the Company recognized a benefit of approximately $766,000 as the result of the reversal of interest and penalties in the provision for income taxes due to the reduction of uncertain tax positions related to the settlement of
various tax audits. As of March 31, 2010 and December 31, 2009, the Company had accrued $373,000 and $1,139,000, respectively, (before income tax benefit) for the payment of interest and penalties.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign
jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in the following major jurisdictions:

In accordance with ASC Topic 350, IntangiblesGoodwill and Other, the Companys goodwill and certain intangible
assets are not amortized, but are subject to an annual impairment test. The following sets forth the intangible assets by major asset class (dollars in thousands):

UsefulLife(Years)

March 31, 2010

December 31, 2009

Gross

AccumulatedAmortization

Net BookValue

Gross

AccumulatedAmortization

Net BookValue

Non-Amortizing:

Trade name, trademark and trade dress and other

NA

$

121,794

$



$

121,794

$

121,794

$



$

121,794

Amortizing:

Patents

2-16

36,459

24,489

11,970

36,459

23,827

12,632

Developed technology and other

1-9

12,237

4,148

8,089

12,236

3,758

8,478

Total intangible assets

$

170,490

$

28,637

$

141,853

$

170,489

$

27,585

$

142,904

Aggregate amortization expense on intangible assets
was approximately $1,052,000 and $1,088,000 for the three months ended March 31, 2010 and 2009, respectively. Amortization expense related to intangible assets at March 31, 2010 in each of the next five fiscal years and beyond is expected
to be incurred as follows (in thousands):

Remainder of 2010

$

3,091

2011

3,892

2012

3,462

2013

2,536

2014

1,886

2015

1,848

Thereafter

3,344

$

20,059

Goodwill at March 31, 2010 and December 31,
2009 was $30,498,000 and $31,113,000, respectively. The decrease in goodwill during the three months ended March 31, 2010 of $615,000 was primarily due to unfavorable foreign currency fluctuations.

The Company has a $10,000,000 investment in the preferred shares of Golf Entertainment International Limited (GEI), the owner
and operator of TopGolf entertainment centers. The Company accounts for this investment in accordance with ASC Topic 325, InvestmentsOther using the cost method, as the Company owns less than a 20% interest in GEI and
does not have the ability to significantly influence the operating and financial policies of GEI. Accordingly, this investment was recorded at cost and is included in other long-term assets in the accompanying consolidated condensed balance sheets
as of March 31, 2010 and December 31, 2009. The Company performs an impairment test whenever there are identified events or changes in circumstances that may have a significant adverse effect on the carrying value of the investment.

In addition, the Company and GEI entered into a Preferred Partner Agreement under which the Company is granted preferred
signage rights, rights as the preferred supplier of golf products used or offered for use at TopGolf facilities at prices no less than those paid by the Companys customers, preferred retail positioning in the TopGolf retail stores, access to
consumer information obtained by TopGolf, and other rights incidental to those listed.

The Company and other GEI shareholders
entered into certain loan agreements with GEI to provide funding to GEI for certain capital projects as well as operational needs. As of March 31, 2010, the Company funded a combined total of $8,398,000 under the loan agreements, which includes
accrued interest and fees of $2,499,000. The total balance of these loans is reflected in other long-term assets in the accompanying consolidated condensed balance sheets. The loan agreements provide for the option, at the Companys discretion,
to convert up to 100 percent of the amount drawn by GEI, including accrued interest, into convertible preferred shares. In connection with the loans, the Company has received underwriting fees and will receive annual interest at market rates on the
loaned amounts.

In February 2008, the Company and another GEI shareholder entered into an arrangement to provide collateral
in the form of a letter of credit in the amount of $8,000,000 for a loan that was issued to a subsidiary of GEI. The terms of this letter of credit were extended through April 30, 2010. In April 2010, GEI negotiated a new loan with a different
lender and used the proceeds from this loan to settle the former loan. In connection with this new loan, the Company entered into a new letter of credit arrangement to provide collateral up to $8,000,000. The prior letter of credit for $8,000,000
was terminated in April 2010.

Investment in Qingdao Suntech Sporting Goods Limited Company

In October 2006, the Company entered into a Golf Ball Manufacturing and Supply Agreement with Qingdao Suntech Sporting Goods Limited
Company (Suntech), where Suntech manufactures and supplies certain golf balls solely for and to the Company. In connection with the agreement, the Company provides Suntech with golf ball raw materials, packing materials, molds, tooling,
as well as manufacturing equipment in order to carry out the manufacturing and supply obligations set forth in the agreement. Suntech provides the personnel as well as the facilities to effectively perform these manufacturing and supply obligations.
Due to the nature of the arrangement, as well as the controlling influence the Company has in the Suntech operations, the Company is required to consolidate the financial results of Suntech in its consolidated condensed financial
statements as of March 31, 2010 and December 31, 2009, in accordance with ASC Topic 810 Consolidations.

Suntech is a wholly-owned subsidiary of Suntech Mauritius Limited Company (Mauritius). The Company has entered into a loan
agreement with Mauritius in order to fund certain capitalization requirements for Suntech

and provide working capital to establish manufacturing facilities and capabilities. In connection with this loan agreement, the Company loaned Mauritius a total of $3,200,000 of which $2,391,000
was outstanding as of March 31, 2010 and December 31, 2009. The Company recorded the loan in other long-term assets in the accompanying consolidated condensed balance sheets.

8. Product Warranty

The
Company has a stated two-year warranty policy for its golf clubs, although the Company sometimes honors warranty claims after the two-year stated warranty period at the Companys discretion. The Companys policy is to accrue the estimated
cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future warranty obligations, the Company considers various relevant factors, including the Companys stated warranty policies and practices, the
historical frequency of claims, and the cost to replace or repair its products under warranty. The decrease in the estimated future warranty obligation is primarily due to the improved durability of newer products. The following table provides a
reconciliation of the activity related to the Companys reserve for warranty expense (in thousands):

Three Months EndedMarch 31,

2010

2009

Beginning balance

$

9,449

$

11,614

Provision

2,154

2,214

Claims paid/costs incurred

(2,242

)

(1,883

)

Ending balance

$

9,361

$

11,945

9. Financing Arrangements

The Companys primary credit facility is a $250,000,000 Line of Credit with a syndicate of eight banks under the terms of the
November 5, 2004 Amended and Restated Credit Agreement (as subsequently amended, the Line of Credit). The Line of Credit is not scheduled to expire until February 15, 2012.

The lenders in the syndicate are Bank of America, N.A., Union Bank of California, N.A., Barclays Bank, PLC, JPMorgan Chase Bank, N.A., US
Bank, N.A., Comerica West Incorporation, Fifth Third Bank, and Citibank, N.A. To date, all of the banks in the syndicate have continued to meet their commitments under the Line of Credit despite the recent turmoil in the financial markets. If any of
the banks in the syndicate were unable to perform on their commitments to fund the Line of Credit, the Companys liquidity would be impaired, unless the Company were able to find a replacement source of funding under the Line of Credit or from
other sources.

The Line of Credit provides for revolving loans of up to $250,000,000, although actual borrowing availability
can be effectively limited by the financial covenants contained therein. The financial covenants are tested as of the end of a fiscal quarter (i.e. on March 31, June 30, September 30, and December 31, each year). So
long as the Company is in compliance with the financial covenants on each of those four days, the Company has access to the full $250,000,000 (subject to compliance with the other terms of the Line of Credit).

The financial covenants include a consolidated leverage ratio covenant and an interest coverage ratio covenant, both of which are based
in part upon the Companys trailing four quarters earnings before interest, income taxes, depreciation and amortization, as well as other non-cash expense and income items as defined in the agreement governing the Line of Credit
(adjusted EBITDA). The consolidated leverage ratio provides that

as of the end of the quarter the Companys Consolidated Funded Indebtedness (as defined in the Line of Credit) may not exceed 2.75 times the Companys adjusted EBITDA for the previous
four quarters then ended. The interest coverage ratio covenant provides that the Companys adjusted EBITDA for the previous four quarters then ended must be at least 3.50 times the Companys Consolidated Interest Charges (as defined in the
Line of Credit) for such period. Many factors, including unfavorable economic conditions and unfavorable foreign currency exchange rates, can have a significant adverse effect upon the Companys adjusted EBITDA and therefore compliance with
these financial covenants. If the Company were not in compliance with the financial covenants under the Line of Credit, it would not be able to borrow funds under the Line of Credit and its liquidity would be significantly affected.

Based on the Companys consolidated leverage ratio covenant and adjusted EBITDA for the four quarters ended March 31, 2010, the
maximum amount of Consolidated Funded Indebtedness, including borrowings under the Line of Credit, that could have been outstanding on March 31, 2010, was $109,900,000. As of March 31, 2010, the Company had $31,000,000 outstanding under
the Line of Credit and had $41,852,000 of cash and cash equivalents. As of March 31, 2010, the Company remained in compliance with the consolidated leverage ratio as well as with the interest coverage ratio covenants. Because the Company
remained in compliance with these financial covenants, as of April 1, 2010, the Company had access to the full $250,000,000 under the Line of Credit (subject to compliance with other terms of the Line of Credit).

In addition to these financial covenants, the Line of Credit includes certain other restrictions, including restrictions limiting
dividends, stock repurchases, capital expenditures and asset sales. As of March 31, 2010, the Company was in compliance with these restrictions and the other terms of the Line of Credit.

Under the Line of Credit, the Company is required to pay certain fees, including an unused commitment fee of between 10.0 to 25.0 basis
points per annum of the unused commitment amount, with the exact amount determined based upon the Companys consolidated leverage ratio. Outstanding borrowings under the Line of Credit accrue interest, at the Companys election, based upon
the Companys consolidated leverage ratio, at (i) the higher of (a) the Federal Funds Rate plus 50.0 basis points or (b) Bank of Americas prime rate, or (ii) the Eurodollar Rate (as defined in the agreement governing
the Line of Credit) plus a margin of 50.0 to 125.0 basis points.

The total origination fees incurred in connection with the
Line of Credit, including fees incurred in connection with the amendments to the Line of Credit, were $2,210,000 and are being amortized into interest expense over the remaining term of the Line of Credit agreement. Unamortized origination fees were
$540,000 as of March 31, 2010, of which $282,000 was included in other current assets and $258,000 in other long-term assets in the accompanying consolidated condensed balance sheet.

10. Commitments and Contingencies

Legal Matters

In conjunction with the Companys program of enforcing its proprietary rights, the Company has initiated or may initiate actions
against alleged infringers under the intellectual property laws of various countries, including, for example, the U.S. Lanham Act, the U.S. Patent Act, and other pertinent laws. The Company is also active internationally. For example, it has worked
with other golf equipment manufacturers to encourage Chinese and other foreign government officials to conduct raids of identified counterfeiters, resulting in the seizure and destruction of counterfeit golf clubs and, in some cases, criminal
prosecution of the counterfeiters. Defendants in these actions may, among other things, contest the validity and/or the enforceability of some of the Companys

patents and/or trademarks. Others may assert counterclaims against the Company. Historically, these matters individually and in the aggregate have not had a material adverse effect upon the
financial position or results of operations of the Company. It is possible, however, that in the future one or more defenses or claims asserted by defendants in one or more of those actions may succeed, resulting in the loss of all or part of the
rights under one or more patents, loss of a trademark, a monetary award against the Company or some other material loss to the Company. One or more of these results could adversely affect the Companys overall ability to protect its product
designs and ultimately limit its future success in the marketplace.

In addition, the Company from time to time receives
information claiming that products sold by the Company infringe or may infringe patent or other intellectual property rights of third parties. It is possible that one or more claims of potential infringement could lead to litigation, the need to
obtain licenses, the need to alter a product to avoid infringement, a settlement or judgment, or some other action or material loss by the Company.

On February 9, 2006, Callaway Golf filed a complaint in the United States District Court in Delaware (Case No. C.A. 06-91) asserting
patent infringement claims against Acushnet, a wholly-owned subsidiary of Fortune Brands, alleging that Acushnets Titleist Pro V1 family of golf balls infringed nine claims contained in four golf ball patents owned by Callaway Golf. Acushnet
later stipulated that the Pro V1 golf balls infringed the nine asserted claims, and the case proceeded to trial on the sole issue of validity. On December 14, 2007, a jury found that eight of the nine patent claims asserted by the Company
against Acushnet were valid, holding one claim invalid. The District Court entered judgment in favor of the Company and against Acushnet on December 20, 2007. On November 10, 2008, the District Court entered an order, effective
January 1, 2009, permanently enjoining Acushnet from further infringing those patent claims, while at the same time denying Acushnets motions for a new trial and for judgment as a matter of law. Acushnet appealed the District Courts
judgment to the Federal Circuit (Appeal No. 2009-1076). On August 14, 2009, the Federal Circuit affirmed in part, reversed in part and remanded the case for a new trial. The Federal Circuit affirmed the trial courts rulings with
respect to claim construction, evidentiary rulings made during the trial and rejected Acushnets motion for judgment as a matter of law, but ruled that the jurys inconsistent verdicts and an error granting partial summary judgment on
Acushnets anticipation defense required the case against Acushnet to be retried. As a result of its ruling, the Federal Circuit also vacated the permanent injunction. The Federal Circuit refused Acushnets petition to rehear the case.
Acushnet filed a petition for review by the United States Supreme Court and Callaway Golf opposed the petition. Acushnets petition was denied on February 22, 2010. The case was retried based upon Callaway Golfs asserted claims. On
March 29, 2010, after a 5-day trial, a jury found that the asserted claims were invalid because the claims were found to be anticipated and obvious. Callaway Golf intends to file a post-trial motion requesting the trial
judge to set aside the verdict.

Acushnet has also filed requests for reexamination with the United States Patent and
Trademark Office (PTO) challenging the validity of the four patents asserted in the litigation. The Company believes that if it secures a favorable final decision before all appeals associated with the reexaminations are completed, the
reexamination process will be terminated with respect to the patent claims at issue in the litigation. In the meantime, an examiner at the PTO has issued decisions rejecting the claims of four of the patents. All four patents are the subject of
appeals pending before the Board of Patent Appeals and Interferences (BPAI). The Company continues to believe that the administrative process will take time and that at least some of the prior claims or newly framed claims submitted as
part of the reexamination proceeding will eventually be affirmed. If the BPAI does not affirm the claims in the patents subject to reexamination, an appeal will be taken by the Company to the Federal Circuit.

On March 3, 2009, the Company filed a complaint in the United States District Court for the District of Delaware, Case No. C.A.
09-131, asserting claims against Acushnet for patent infringement. Specifically, the

Company asserts that two golf ball patents acquired from Top Flite are infringed by Acushnets sale of Titleist Pro V1 golf balls introduced after entry of the Courts permanent
injunction referenced above. In the second suit, the Company is seeking damages and an injunction to prevent infringement by Acushnet. Acushnets response to the complaint was filed on April 17, 2009, and the case is in the discovery
phase. Trial has been set for March 2012.

Acushnet has filed requests for reexamination with the PTO challenging the validity
of the two patents asserted by the Company in the new litigation filed against Acushnet. The PTO has issued office actions with respect to each of the patents to which the Company has responded.

On March 3, 2009, Acushnet filed a complaint in the United States District Court for the District of Delaware, Case No. C.A. 09-130,
asserting claims against the Company for patent infringement. Specifically, Acushnet asserts that the Companys sale of the Tour i and Tour ix golf balls infringe nine Acushnet golf ball patents. Acushnet has since dropped one of the patents,
but expanded its infringement contentions to allege that seven other models of the Companys golf balls, using Callaway Golfs patented HX surface geometry, infringe five of the Acushnet patents asserted in the new suit. Acushnet is
seeking damages and an injunction to prevent alleged infringement by the Company. The Companys response to the complaint was filed on April 17, 2009, and the case has been consolidated for discovery and pretrial with Callaway Golfs
March 3, 2009 case against Acushnet, described above. The case has been set for trial in March 2012. The district court has not yet determined whether the cases will be tried together or separately.

On May 8, 2008, Kenji Inaba filed a suit against Callaway Golf Japan in the Osaka District Court in Japan. Inaba has alleged that
certain golf balls sold by Callaway Golf Japan with a hex aerodynamic pattern infringe his Japanese utility design patent No. 3,478,303 and his Japanese design patent No. 1,300,582. Inaba is seeking damages pursuant to a royalty based on
sales. Callaway Golf Japan filed an administrative proceeding in the Japan Patent and Trademark Office (Japan PTO) seeking to invalidate the patents in suit. The Japan PTO ruled that the asserted claims in the Inaba patents are invalid.
The Osaka District Court also ruled, on different grounds, that the patents are invalid and also that Callaway Golf does not infringe the patents. Inaba appealed both the Osaka District Court and Japan PTO rulings to the Japan Intellectual Property
High Court. The Intellectual Property High Court is considering the appeal of the Japan PTOs ruling on the design patent, has remanded the invalidation of the utility patent to the Japan PTO for further proceedings based on a technical issue,
and is considering the appeal of the Osaka District Courts decision.

On July 11, 2008, the Company was sued in the
Eastern District of Texas by Nicholas Colucci, dba EZ Line Putters, pursuant to a complaint asserting that the Odyssey White Hot XG No. 7, White Hot XG (Long) No. 7, Black Series i No. 7, and White Hot XG Sabertooth putters infringed
U.S. Patent No. 4,962,927 literally and through the doctrine of equivalents. The complaint also alleged that the Companys Marxman and iTrax putters infringed the alleged trade dress of plaintiffs EZ Line putters. The Company
responded to the complaint on September 5, 2008, denying that it infringed the patent or trade dress. After a five day trial, a jury found that Callaway Golf did not literally infringe the patent, and did not infringe the trade dress of
plaintiffs putters. The jury determined that Callaway Golf did infringe the patent pursuant to the doctrine of equivalents but awarded plaintiff only $135,000. Callaway Golf has asked the trial court to set aside the jurys verdict, and
to enter judgment for Callaway Golf, on the equivalents claim. The plaintiff has asked for a new trial on damages. Both motions are pending.

On January 19, 2009, the Company filed suit in the Superior Court for the County of San Diego, case no. 37-2009-00050363-CU-BC-NC,
against Corporate Trade International, Inc. (CTI) seeking damages for breach of contract and for declaratory relief based on the asserted use and transfer of corporate trade credits to the

Company in connection with the purchase of assets from Top-Flite in 2003. On January 26, 2009, CTI filed its own suit in the United States District Court for the Southern District of New
York, case no. 09CV0698, asserting claims for breach of contract, account stated and unjust enrichment, and seeking damages of approximately $8,900,000. On February 26, 2009, CTI removed the Companys San Diego case to the United States
District Court for the Southern District of California, and filed a motion to dismiss, stay or transfer the California action to New York. On March 1, 2010, the San Diego case was transferred to the Southern District of New York where it has
been assigned to the same Judge as the New York case. Discovery has not yet commenced.

On June 2, 2009, the Company was
sued in the United States District Court for the Eastern District of Pennsylvania, case no. 09-2454, by Greenkeepers, Inc. and Greenkeepers of Delaware, LLC asserting that the Company is infringing U.S. Patent number RE40,407, relating to the golf
spikes used in the Companys golf shoes. The Company answered the complaint on June 23, 2009 denying infringement. The Company tendered the matter to its golf spike vendor, Softspikes LLC, which has accepted the defense while reserving its
rights pursuant to an indemnity agreement between the parties. Greenkeepers and Softspikes have agreed to resolve the entire litigation, including the indemnified claim against Callaway Golf, on terms that are confidential and at no cost to Callaway
Golf.

The Company and its subsidiaries, incident to their business activities, are parties to a number of legal proceedings,
lawsuits and other claims, including the matters specifically noted above. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, management is unable to estimate the ultimate aggregate amount
of monetary liability, amounts which may be covered by insurance, or the financial impact with respect to these matters. Management believes at this time that the final resolution of these matters, individually and in the aggregate, will not have a
material adverse effect upon the Companys consolidated financial condition.

Unconditional Purchase Obligations

During the normal course of its business, the Company enters into agreements to purchase goods and services, including
purchase commitments for production materials, endorsement agreements with professional golfers and other endorsers, consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees.
In addition, the Company has made contractual commitments to each of its officers and certain other employees (see further discussion below). It is not possible to determine the amounts the Company will ultimately be required to pay under these
agreements as they are subject to many variables including performance-based bonuses, reductions in payment obligations if designated minimum performance criteria are not achieved, and severance arrangements.

As of March 31, 2010, the Company has entered into many of these contractual
agreements with terms ranging from one to five years. The minimum obligation that the Company is required to pay under these agreements is $115,029,000 over the next five years. In addition, the Company also enters into unconditional purchase
obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for an invoice. Such unconditional purchase obligations are
generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this total. Future minimum purchase commitments as of March 31, 2010 are as follows
(in thousands):

2010

$

54,616

2011

29,496

2012

15,773

2013

9,508

2014

5,636

Thereafter



$

115,029

Other Contingent Contractual Obligations

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which
it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Companys customers and licensees in connection with the use, sale and/or license of Company products,
(ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to the goods or services provided to the
Company or based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has consulting agreements that provide for
payment of nominal fees that are contingent upon the issuance of patents and/or the commercialization of research results. The Company has also issued guarantees in the form of two standby letters of credit as security for contingent liabilities
under certain workers compensation insurance policies and as collateral for a loan issued to GEI. In addition, in connection with the uPlay acquisition in December 2008, the Company could be required to pay an additional purchase price,
not to exceed $10,000,000, based on a percentage of earnings generated from the sale of uPlay products over a period of three years ending on December 31, 2011.

The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these
indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to
the Companys financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote that material payments will be required under the indemnities, commitments and guarantees described above. The
fair value of indemnities, commitments and guarantees that the Company issued during the three months ended March 31, 2010 was not material to the Companys financial position, results of operations or cash flows.

Employment Contracts

The Company has entered into employment contracts with each of the Companys officers. These contracts generally provide for
severance benefits, including salary continuation, if employment is terminated by the Company for convenience or by the officer for substantial cause. In addition, in order to assure that the officers

would continue to provide independent leadership consistent with the Companys best interests in the event of an actual or threatened change in control of the Company, the contracts also
generally provide for certain protections in the event of such a change in control. These protections include the payment of certain severance benefits, including salary continuation, upon the termination of employment following a change in control.

11. Share-Based Employee Compensation

As of March 31, 2010, the Company had the following two shareholder approved stock plans under which shares were available for
equity-based awards: the Callaway Golf Company Amended and Restated 2004 Incentive Plan (the 2004 Plan) and the 2001 Non-Employee Directors Stock Incentive Plan (the 2001 Directors Plan). From time to time, the Company grants
Stock Options, Restricted Stock Awards, Restricted Stock Units, Performance Share Units and other awards under these two plans.

The table below summarizes the non-cash amounts recognized in the financial statements for the three months ended March 31, 2010 and
2009 for share-based compensation, including expense for Phantom Stock Units granted to employees (in thousands).

Three months endedMarch 31,

2010

2009

Cost of sales

$

254

$

105

Operating expenses

3,330

2,144

Total cost of employee share-based compensation included in income, before income tax

3,584

2,249

Amount of income tax recognized in earnings

(1,140

)

(595

)

Amount charged against net income

$

2,444

$

1,654

Impact on net income per common share:

Basic

$

(0.04

)

$

(0.03

)

Diluted

$

(0.03

)

$

(0.03

)

In addition, as a result
of the mark-to-market adjustment for Restricted Stock awards granted to certain non-employees, the Company reversed $287,000 of compensation expense during the three months ended March 31, 2009. Restricted Stock awards related to non-employees
were fully vested as of December 31, 2009.

Stock Options

The Company granted 1,219,000 and 2,840,000 shares underlying Stock Options during the three months ended March 31, 2010 and 2009,
respectively, at a weighted average grant-date fair value of $2.84 and $2.37 per share.

The Company records compensation expense for employee stock options based on the
estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The table below summarizes the weighted average Black-Scholes fair value assumptions used in the valuation of Stock Options granted during the
three months ended March 31, 2010 and 2009.

Three Months EndedMarch 31,

2010

2009

Dividend yield

1.1

%

1.9

%

Expected volatility

46.2

%

42.6

%

Risk free interest rate

2.2

%

1.4

%

Expected life

4.7 years

4.1 years

Restricted Stock Units

The Company granted 452,000 and 456,000 shares underlying Restricted Stock Units during the three months ended March 31, 2010 and
2009, respectively, at a weighted average grant-date fair value of $7.54 and $7.82, respectively. At March 31, 2010, the Company had $6,115,000 of total unrecognized compensation expense related to non-vested shares granted to employees under
the Companys share-based payment plans related to Restricted Stock Units. The amount of unrecognized compensation expense noted above does not necessarily represent the amount that will ultimately be realized by the Company in its consolidated
condensed statement of operations due to the application of forfeiture rates.

Phantom Stock Units

Phantom Stock Units awarded under the 2004 Plan are a form of share-based award that is indexed to the Companys stock and is settled
in cash. They are accounted for as liabilities, which are initially measured based on the estimated fair value of the awards on the date of grant. The estimated fair value is determined based on the closing price of the Companys common stock
on the award date multiplied by the number of shares underlying the phantom stock units awarded. The liabilities are subsequently remeasured based on the fair value of the awards at the end of each interim reporting period through the settlement
date of the awards. Total compensation expense is recognized on a straight-line basis over the vesting period, reduced by an estimated forfeiture rate. On December 29, 2009, the Company granted 1,150,000 shares underlying Phantom Stock Units,
of which fifty percent will vest on the second anniversary of the date of grant, and the remaining fifty percent will vest on the third anniversary of the date of grant. On December 29, 2009, these Phantom Stock Units had an initial valuation
of $9,050,000. At December 31, 2009, the value of these awards was $8,671,000. As of March 31, 2010, the remeasurement date, the value of these awards increased to $10,142,000 due to an increase in the price of the Companys common
stock. For the three months ended March 31, 2010, the Company recorded expense of $1,065,000 in connection with these awards.

12.
Fair Value of Financial Instruments

The Companys foreign currency exchange contracts are measured and reported on a
fair value basis in accordance with ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosure about fair value measurements. ASC 820 enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the

quality and reliability of the information used to determine fair values. ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the
following three categories:

Level 2: Observable market based inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

The following table summarizes the valuation of the Companys foreign currency exchange contracts by the above pricing levels as of
the valuation dates listed (in thousands):

March 31, 2010

December 31, 2009

CarryingValue

Observablemarket basedinputs(Level 2)

CarryingValue

Observablemarket basedinputs(Level 2)

Foreign currency derivative instrumentsasset position

$

4,390

$

4,390

$

2,705

$

2,705

Foreign currency derivative instrumentsliability position

933

933

47

47

The fair value of the
Companys foreign currency exchange contracts is determined based on observable inputs that are corroborated by market data. Foreign currency derivatives on the balance sheet are recorded at fair value with changes in fair value recorded in the
statement of operations. See Note 13 below for further information on foreign currency exchange contracts.

13. Derivatives and Hedging

The Company accounts for its foreign currency exchange contracts in accordance with ASC Topic 815, Derivatives
and Hedging (ASC 815). ASC 815 requires the recognition of all derivatives as either assets or liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of changes in the fair
value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures. In addition, it requires enhanced disclosures regarding derivative instruments and hedging activities to
better convey the purpose of derivative use in terms of the risks the Company is intending to manage, specifically about (a) how and why the Company uses derivative instruments, (b) how derivative instruments and related hedged items are
accounted for under ASC 815, and (c) how derivative instruments and related hedged items affect the Companys financial position, financial performance, and cash flows.

The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its
international subsidiaries, including certain balance sheet exposures (payables and receivables denominated in foreign currencies) as well as reported results in the Companys consolidated condensed financial statements due to the translation
of the operating results of the Companys international subsidiaries into U.S. dollars for financial reporting purposes. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the
Company uses derivative financial instruments in the form of foreign currency forward contracts and put and call option contracts (foreign currency exchange contracts) to hedge transactions that are denominated primarily in British
Pounds, Euros, Japanese Yen, Canadian Dollars, Australian Dollars and Korean Won. Foreign currency exchange contracts are used only to meet the Companys objectives of minimizing variability in the Companys operating results arising from
foreign exchange rate movements. The Company does not enter into foreign currency exchange contracts for speculative purposes. Foreign currency exchange contracts usually mature within twelve months from their inception.

During the three months ended March 31, 2010 and 2009, the Company did not
designate any foreign currency exchange contracts as derivatives that qualify for hedge accounting under ASC 815. At March 31, 2010 and 2009, the notional amounts of the Companys foreign currency exchange contracts used to hedge the
exposures discussed above were approximately $168,840,000 and $138,611,000, respectively. The Company estimates the fair values of foreign currency exchange contracts based on pricing models using current market rates, and records all derivatives on
the balance sheet at fair value with changes in fair value recorded in the statement of operations.

The following table
summarizes the fair value of derivative instruments by contract type as well as the location of the asset and/or liability on the consolidated condensed balance sheets at March 31, 2010 and December 31, 2009 (in thousands):

Asset Derivatives

March 31, 2010

December 31, 2009

Derivatives not designated as hedging

instruments

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Foreign currency exchange contracts

Other current assets

$

4,390

Other current assets

$

2,705

Liability Derivatives

March 31, 2010

December 31, 2009

Derivatives not designated as hedginginstruments

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Foreign currency exchange contracts

Accounts payable andaccrued expenses

$

933

Accounts payable andaccrued expenses

$

47

The gains and losses on
foreign currency exchange contracts used to manage balance sheet exposures are recognized as a component of other income (expense) in the same year as the remeasurement gain and loss of the related foreign currency denominated assets and liabilities
and thus generally offset these gains and losses. The gains and losses on foreign currency exchange contracts used to manage exposures related to the translation of the operating results of the Companys international subsidiaries into U.S.
dollars for financial reporting purposes are recognized as a component of other income (expense) in the same year as the foreign currency gains and losses related to the translation of the Companys international operating results. The
following table summarizes the location of gains on the consolidated condensed statements of operations that were recognized during the three months ended March 31, 2010 and 2009, respectively, in addition to the derivative contract type (in
thousands):

Amount of Gain (Loss) Recognized inIncome on Derivative
Instruments

Derivatives not designated as hedginginstruments

Location of gain (loss) recognized inincome on derivative instruments

Three months endedMarch 31,

2010

2009

Foreign currency exchange contracts

Other income

$

1,274

$

3,402

The net realized and
unrealized contractual net gains recognized for the three months ended March 31, 2010 were in addition to actual foreign currency transactional net gains of $52,000. The net realized and unrealized contractual net gains for the three months
ended March 31, 2009 were used by the Company to offset actual foreign currency transactional net losses of $6,100,000.

The Company has two operating segments that are organized on the basis of products, which are segregated between golf clubs and golf
balls. The golf clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters, other golf-related accessories, including uPro GPS on-course measurement devices,
royalties from licensing of the Companys trademarks and service marks as well as sales of pre-owned golf clubs. The golf balls segment consists primarily of Callaway Golf and Top-Flite golf balls. There are no significant intersegment
transactions.

The table below contains information utilized by management to evaluate its operating segments for the interim
periods presented (in thousands).

Three Months EndedMarch 31,

2010

2009

Net sales

Golf Clubs

$

251,740

$

224,516

Golf Balls

51,135

47,348

$

302,875

$

271,864

Income (loss) before income taxes

Golf Clubs

$

43,614

$

28,281

Golf Balls

1,896

(1,698

)

Reconciling
items(1)

(15,566

)

(15,523

)

$

29,944

$

11,060

Additions to long-lived assets

Golf Clubs

$

3,621

$

6,670

Golf Balls

102

1,541

$

3,723

$

8,211

(1)

Represents corporate general and administrative expenses and other income (expense) not utilized by management in determining segment profitability.

Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Condensed Financial Statements and the related notes that
appear elsewhere in this report. See also Important Notice to Investors on page 2 of this report.

Results of Operations

Overview of Business and Seasonality

The Company designs, manufactures and sells high quality golf clubs and golf balls and also sells golf and lifestyle apparel, golf
footwear, golf bags, gloves, eyewear and other golf-related accessories, including uPro GPS on-course measurement devices. The Company designs its products to be technologically advanced and in this regard invests a considerable amount in
research and development each year. The Companys golf products are designed for golfers of all skill levels, both amateur and professional.

The Company has two operating segments that are organized on the basis of products, namely the golf clubs segment and golf balls segment.
The golf clubs segment consists primarily of Callaway Golf, Top-Flite and Ben Hogan woods, hybrids, irons, wedges and putters as well as Odyssey putters. This segment also includes other golf-related accessories described above and royalties from
licensing of the Companys trademarks and service marks as well as sales of pre-owned golf clubs. The golf balls segment consists primarily of Callaway Golf and Top-Flite golf balls. As discussed in Note 14 Segment Information to
the Notes to Consolidated Condensed Financial Statements, the Companys operating segments exclude a significant amount of corporate general administrative expenses and other income (expense) not utilized by management in determining segment
profitability.

In most of the regions where the Company does business, the game of golf is played primarily on a seasonal
basis. Weather conditions generally restrict golf from being played year-round, except in a few markets, with many of the Companys on-course customers closing for the cold weather months. The Companys business is therefore also subject
to seasonal fluctuations. In general, during the first quarter, the Company begins selling its products into the golf retail channel for the new golf season. This initial sell-in generally continues into the second quarter. The Companys second
quarter sales are also significantly affected by the amount of reorder business of the products sold during the first quarter. The Companys third quarter sales are generally dependent on reorder business but are generally less than the second
quarter as many retailers begin decreasing their inventory levels in anticipation of the end of the golf season. The Companys fourth quarter sales are generally less than the other quarters due to the end of the golf season in many of the
Companys key markets. However, fourth quarter sales can be affected from time to time by the early launch of product introductions related to the new golf season of the subsequent year. This seasonality, and therefore quarter to quarter
fluctuations, can be affected by many factors, including the timing of new product introductions. In general, however, because of this seasonality, a majority of the Companys sales and most, if not all, of its profitability generally occurs
during the first half of the year.

Approximately half of the Companys business is conducted outside of the United
States and is conducted in currencies other than the U.S. dollar. For reporting purposes, transactions conducted in foreign currencies must be translated into U.S. dollars based upon applicable foreign currency exchange rates. Fluctuations in
foreign currency rates therefore can have a significant effect on the Companys reported financial results. In general, the Companys financial results are affected positively by a weaker U.S. dollar and are affected negatively by a
stronger U.S. dollar as compared to the foreign currencies in which the Company conducts its business. The Companys hedging activities can mitigate but do not eliminate the effects of the foreign currency fluctuations. As a result of the
overall weakening of the U.S. dollar during the first quarter of 2010 compared to the same period in 2009, the translation of foreign currency exchange rates had a positive impact on the Companys financial results during the first three months
in 2010.

Overall, in the first quarter of 2010, economic conditions and foreign currency rates in most of the Companys key regions were more
favorable to the Company than in the first quarter of 2009. These improved macroeconomic conditions, together with the strength of the Companys new products for 2010, resulted in a $31.0 million (11%) increase in net sales compared to the
first quarter of 2009. Changes in foreign currency rates favorably affected net sales by approximately $14.8 million. Management believes that its first quarter 2010 net sales were tempered by poor weather conditions in many of the Companys
key regions which delayed the opening of the golf season in those regions.

During the first quarter of 2010, the Company
continued to realize the benefits of its initiatives targeted at improved gross margins, which initiatives resulted in reduced component and raw material costs, as well as reduced manufacturing costs. As a result, the Companys gross profit as
a percent of net sales improved to 45% for the first quarter of 2010 compared to 43% for the first quarter of 2009.

The
Companys operating expenses increased $6.2 million in the first quarter of 2010 compared to the first quarter of 2009, primarily as a result of an increase in accruals for employee incentive compensation, the restoration in 2010 of employee
benefits that had been reversed or temporarily suspended in 2009, and the continued investment in growth initiatives such as the Companys entry into India, its uPlay business, and its apparel business. Despite these increases and additional
investments, operating expenses as a percent of net sales improved to 36% for the first quarter of 2010 compared to 38% for the first quarter of 2009.

The Companys improvement in net sales and gross margins, along with a $4.0 million increase in other income/(expense) resulting
from gains on foreign currency contracts, resulted in a $13.5 million (198%) increase in net income in the first quarter of 2010 compared to the first quarter of 2009. As a result, earnings per share for the first quarter of 2010 improved to
$0.24 per diluted common share (on 83.9 million weighted average shares outstanding) compared to $0.11 per diluted common share (on 63.3 million weighted average shares outstanding) for the first quarter of 2009.

As discussed above, the Companys business is seasonal and the second quarter is generally when the consumer purchase cycle peaks.
The second quarter therefore is historically very important to the Companys full year results and will be a good indicator of the degree to which the Companys business will recover in 2010.

Net sales for the first quarter of 2010 increased by $31.0 million (11%) to $302.9 million compared to $271.9 million in the first
quarter of 2009. This increase was primarily due to the successful launch of a strong golf product line in 2010 combined with the effects of an improving economy in certain regions where the Company conducts its business. The increase in net sales
were also favorably affected by the Companys expansion into other international regions as well as the impact of foreign currency exchange rates on net sales as a result of a weaker U.S. dollar in the first quarter of 2010 compared to the same
period in 2009. These factors were partially offset by a delay in the opening of the golf season due to poor weather conditions in certain key regions during the first three months of 2010. This increase reflects a $27.2 million increase in net
sales of the Companys golf clubs segment and a $3.8 million increase in net sales of the Companys golf balls segment as presented below (dollars in millions):

Three Months EndedMarch 31,

Growth (Decline)

2010

2009

Dollars

Percent

Net sales

Golf clubs

$

251.8

$

224.6

$

27.2

12

%

Golf balls

51.1

47.3

3.8

8

%

$

302.9

$

271.9

$

31.0

11

%

For further discussion of each operating segments results, see Golf Club and Golf Ball
Segments Results below.

Net sales information by region is summarized as follows (dollars in millions):

Three Months EndedMarch 31,

Growth/(Decline)

2010

2009

Dollars

Percent

Net sales:

United States

$

151.1

$

141.3

$

9.8

7

%

Europe

42.3

43.0

(0.7

)

(2

)%

Japan

53.4

47.4

6.0

13

%

Rest of Asia

24.6

16.6

8.0

48

%

Other foreign countries

31.5

23.6

7.9

33

%

$

302.9

$

271.9

$

31.0

11

%

Net sales in the United States increased $9.8 million to $151.1 million during the first quarter
of 2010 compared to the same period in the prior year. The Companys sales in regions outside of the United States increased $21.2 million (16%) to $151.8 million during the first quarter of 2010 compared to the same quarter in 2009. The
increase in net sales in the United States and internationally was primarily attributable to the successful launch of new products during the first quarter of 2010, as well as an improvement in economic conditions in certain regions where the
Company conducts its business. In addition, compared to the first quarter of 2009, the Companys reported net sales in regions outside the U.S. in the first quarter of 2010 were favorably affected by the translation of foreign currency sales
into U.S. dollars based upon 2010 exchange rates. If 2009 rates were applied to 2010 reported sales in regions outside the U.S. and all other factors were held constant, net sales in such regions would have been $14.8 million less than reported in
the first quarter of 2010.

For the first quarter of 2010, gross profit increased $21.1 million to $137.3 million from $116.2
million in the first quarter of 2009. Gross profit as a percentage of net sales (gross margin) increased to 45% in the first quarter of 2010 compared to 43% in the first quarter of 2009. The increase in gross margin was primarily

attributable to cost reductions on golf club components costs and golf ball raw materials in addition to a favorable shift in golf club and golf ball production to more cost efficient regions
outside the U.S. These increases were partially offset by an unfavorable shift in product mix within golf clubs combined with price reductions taken on older golf club products. See Segment Profitability below for further discussion of
gross margins. Gross profit for the first quarter of 2010 was negatively affected by charges of $1.0 million related to the Companys initiatives targeted at improved gross margins compared to $1.6 million in the first quarter of 2009.

Selling expenses decreased $0.1 million to $74.6 million in the first quarter of 2010 compared to $74.7 million in the
comparable period of 2009. As a percentage of net sales, selling expenses improved to 25% in the first quarter of 2010 compared to 27% in the first quarter of 2009. This decrease includes a $2.9 million decrease in advertising and promotional
activities, partially offset by a $2.5 million increase in employee costs, primarily due to an increase in employee incentive compensation expense, the restoration of employee benefits in 2010 and sales commissions.

General and administrative expenses increased $5.0 million (25%) to $25.0 million in the first quarter of 2010 compared to $20.0
million in the comparable period of 2009. As a percentage of net sales, general and administrative expenses increased to 8% in the first quarter of 2010 from 7% in the first quarter of 2009. The dollar increase was primarily due to an increase in
employee incentive compensation expense as well as the restoration of employee benefits in 2010.

Research and development
expenses increased $1.2 million (15%) to $9.3 million in the first quarter of 2010 compared to $8.1 million in the comparable period of 2009. As a percentage of sales, research and development expenses remained constant at 3% in the first
quarter of 2010 and 2009. The dollar increase was primarily due to an increase in employee incentive compensation expense as well as the restoration of employee benefits in 2010.

Other income (expense) improved by $4.0 million in the first quarter of 2010 to other income of $1.6 million compared to other expense of
$2.4 million in the comparable period of 2009. This improvement was primarily attributable to net foreign currency gains reported in the first quarter of 2010 compared to net foreign currency losses reported in the first quarter of 2009.

The effective tax rate for the first quarter of 2010 was 32.2% compared to 38.4% for the comparable period in 2009. The tax rate in the
first quarter of 2010 benefited from net favorable adjustments to previously estimated tax liabilities resulting from the release of tax contingencies related to the settlement of various issues under tax examination.

Net income for the first quarter of 2010 increased to $20.3 million from $6.8 million in the comparable period of 2009. Net income
allocable to common shareholders for the first quarter of 2010 includes a reduction of $2.6 million for dividends on convertible preferred stock (as defined below). Diluted earnings per share increased to $0.24 per share on 83.9 million
weighted average shares outstanding in the first quarter of 2010 compared to $0.11 per share on 63.3 million weighted average shares outstanding in the first quarter of 2009. Diluted earnings per share for the first quarter of both 2010 and
2009 were negatively affected by $0.01 per share related to after-tax costs incurred in connection with the Companys global operations strategy initiatives.

Golf Clubs and Golf Balls Segments Results for the Three Months Ended March 31, 2010 and 2009

The increase in net sales during the first quarter of 2010 was primarily due to a successful product launch combined with the effects of
an improving economy in certain regions where the Company conducts its business as compared to the same period in the prior year. This increase had a positive impact on the Companys sales volumes and average selling prices as discussed below.
In addition, the increase in net sales also includes the favorable impact of foreign currency exchange rates due to the overall weakening of the U.S. dollar against the foreign currencies in which the Company conducts its business.

Net sales information by product category is summarized as follows (dollars in millions):

Three Months EndedMarch 31,

Growth/(Decline)

2010

2009

Dollars

Percent

Net sales:

Woods

$

94.5

$

79.9

$

14.6

18

%

Irons

57.4

65.2

(7.8

)

(12

)%

Putters

38.2

27.7

10.5

38

%

Accessories and other

61.7

51.8

9.9

19

%

$

251.8

$

224.6

$

27.2

12

%

The $14.6 million (18%) increase in net sales of woods to $94.5 million for the quarter ended
March 31, 2010 was primarily attributable to an increase in sales volume and average selling prices. The increase in sales volume was primarily due to an increase in the number of woods products launched in the first quarter of 2010 led by
Diablo Edge, Fusion Technology (FT-iz) and Legacy woods products compared to the same time period in the prior year. This increase was partially offset by a decrease in reorders of prior year model drivers. The increase in average
selling prices was primarily due to a shift in product mix as a result of the launch of premium FT-iz fairway woods, hybrids and drivers in the first quarter of 2010, compared to lower priced product models launched in the same time period in the
prior year. Average selling prices were negatively affected in the first quarter of 2009 by price reductions taken on older driver models. There were no significant price reductions taken on woods products during the first quarter of 2010.

The $7.8 million (12%) decrease in net sales of irons to $57.4 million for the quarter ended March 31, 2010 was
primarily attributable to decreases in both sales volume and average selling prices. The decrease in sales volume was primarily attributable to fewer iron models launched in the first quarter of 2010 compared to the same period in the prior year.
The decrease in average selling prices was largely due to a shift in product mix as a result of the launch of lower priced Diablo Edge irons in the first quarter of 2010 compared to the higher priced X-22 and X Forged irons launched in the first
quarter of 2009. In addition, average selling prices were negatively affected by price reductions taken on second year irons products and by increased sales of value priced irons launched in the first quarter of 2010.

The $10.5 million (38%) increase in net sales of putters to $38.2 million for the quarter ended March 31, 2010 was primarily
attributable to increases in both sales volume and average selling prices. The increase in sales volume was primarily due to an increase in putter models offered in the first quarter of 2010 compared to the first quarter of 2009. The increase in
average selling prices was attributable to sales of the new White Ice series of putters introduced in 2010, which outpaced the decline in sales of the older White Hot XG series of putters. In addition, average selling prices were favorably affected
by the current year launch of the premium Black Series ix line of putters as well as the current year launch of the Backstryke putter models, which were introduced at a higher price compared to the models launched in the first quarter of 2009.

The $9.9 million (19%) increase in net sales of accessories and other products to $61.7 million for the quarter ended
March 31, 2010 was primarily attributable to increased sales of packaged sets, which include the current year launch of the womens Solaire line of golf clubs. In addition, net sales for the first quarter of 2010 include increased revenues
recognized from the sale of golf apparel under the new distribution agreement with Perry Ellis International compared to licensing revenues recognized in the first quarter of 2009 under the former agreement with Ashworth, Inc. Also contributing to
the increase in net sales were increases in sales of golf gloves as well as the new uPro Go on-course global positioning device range finders.

Net sales information for the golf balls segment is summarized as follows (dollars in millions):

Three Months EndedMarch 31,

Growth/(Decline)

2010

2009

Dollars

Percent

Net sales:

Golf balls

$

51.1

$

47.3

$

3.8

8

%

The $3.8
million (8%) increase in net sales of golf balls to $51.1 million for the quarter ended March 31, 2010 was primarily due to an increase in both sales volume and average selling prices. The increase in sales volume was driven by the current
year launch of the new premium Tour is and iz golf balls, which outpaced the decline in sales of the older Tour i and ix golf ball models. The increase in average selling prices was generated by a shift in product mix as a result of sales of
moderately priced Callaway Golf ball models as well as lower priced Top-Flite golf ball models during the first quarter of 2009, compared to sales of a more premium line of golf balls during the first quarter of 2010.

Segment Profitability

Profitability by operating segment is summarized as follows (dollars in millions):

Three Months EndedMarch 31,

Growth (Decline)

2010

2009

Dollars

Percent

Income (loss) before income taxes

Golf clubs

$

43.6

$

28.3

$

15.3

54

%

Golf balls

1.9

(1.7

)

3.6

212

%

Reconciling
items(1)

(15.6

)

(15.5

)

(0.1

)

(1

)%

$

29.9

$

11.1

$

18.8

169

%

(1)

Reconciling items represent the deduction of corporate general and administration expenses and other income (expenses) of $15.6 million and $15.5 million for the three
months ended March 31, 2010 and 2009, respectively, which are not utilized by management in determining segment profitability. For further information on segment reporting see Note 14 to the Consolidated Condensed Financial
StatementsSegment Information in this Form 10-Q.

Pre-tax income in the Companys golf
clubs operating segment increased to $43.6 million for the first quarter of 2010 from $28.3 million for the comparable period in the prior year. This increase was primarily attributable to the increase in net sales as discussed above combined with
an increase in gross margin. The increase in gross margin was primarily due to cost savings provided by the Companys initiatives targeted at improved gross margins, including cost reductions on club components as a result of improved product
designs and sourcing of lower cost raw materials. This increase was partially offset by an unfavorable shift in product mix within irons products as a result of sales of lower margin Diablo Edge and value priced irons as well as price reductions
taken on older irons products in the first quarter of 2010, compared to sales of higher margin X-22 irons in the comparable quarter of 2009.

Pre-tax income (loss) in the Companys golf balls operating segment increased to pre-tax income of $1.9 million for the first
quarter of 2010 from a pre-tax loss of $1.7 million for the comparable period in the prior year. This increase was primarily due to the increase in net sales as discussed above combined with an increase in gross margin. The increase in gross margin
was primarily due to a favorable shift in golf ball production to more cost efficient regions outside the U.S. as well as a reduction in the cost of golf ball raw materials. This increase was partially offset by price reductions taken on older golf
ball product lines during the first quarter of 2010.

The Company has continued to actively implement the global operations strategy initiatives.
As a result of these initiatives, the Companys golf clubs and golf balls operating segments absorbed pre-tax charges of $0.8 million and $0.3 million, respectively, during the first quarter of 2010 and $1.2 million and $0.4 million,
respectively, during the comparable period in 2009.

Financial Condition

The Companys cash and cash equivalents decreased $36.4 million (47%) to $41.9 million at March 31, 2010, from $78.3
million at December 31, 2009. Most of this decrease was due to the general seasonality of the Companys business. Generally, during the first quarter, the Company will rely more heavily on its credit facility to fund operations as cash
inflows from operations begin to increase during the second quarter as a result of cash collections from customers. During the three months ended March 31, 2010, the Company used its cash and cash equivalents as well as proceeds from its credit
facility of $31.0 million to fund cash used in operating activities of $59.1 million as well as $4.1 million in capital expenditures. Management expects to fund the Companys future operations from cash provided by its operating activities
combined with borrowings from its credit facility, as deemed necessary (see further information on the Companys credit line below).

The Companys accounts receivable balance fluctuates throughout the year as a result of the general seasonality of the
Companys business. The Companys accounts receivable balance will generally be at its highest during the first and second quarters and decline significantly during the third and fourth quarters as a result of an increase in cash
collections and lower sales. As of March 31, 2010, the Companys net accounts receivable increased $137.6 million to $277.4 million from $139.8 million as of December 31, 2009. The increase in accounts receivable reflects the general
seasonality of the business and was primarily attributable to net sales of $302.9 million during the first quarter of 2010 compared to net sales of $185.9 million during the fourth quarter of 2009. The Companys net accounts receivable
increased by $38.1 million as of March 31, 2010 compared to the Companys net accounts receivable as of March 31, 2009. This increase was primarily attributable to a $31.0 million increase in net sales in the first quarter of 2010
compared to the first quarter of 2009.

The Companys inventory balance also fluctuates throughout the year as a result
of the general seasonality of the Companys business. Generally, the Companys buildup of inventory levels begins during the fourth quarter and continues heavily into the first quarter as well as into the beginning of the second quarter in
order to meet demand during the height of the golf season. Inventory levels start to decline toward the end of the second quarter and are at their lowest during the third quarter. The Companys net inventory increased $11.6 million to $230.8
million as of March 31, 2010 compared to $219.2 million as of December 31, 2009. This increase is consistent with the seasonality of the Companys business. The Companys net inventory decreased by $31.3 million as of
March 31, 2010 compared to the Companys net inventory as of March 31, 2009. Net inventories as a percentage of the trailing twelve months net sales improved to 23.5% as of March 31, 2010 compared to 25.6% as of March 31,
2009. The Company believes this improvement is the direct result of the increase in net sales in 2010 combined with the Companys continuous improvements in supply chain management.

Liquidity and Capital Resources

Sources of Liquidity

The Companys primary credit facility is a $250.0 million Line of Credit with a syndicate of eight banks under the terms of the
November 5, 2004 Amended and Restated Credit Agreement (as subsequently amended, the Line of Credit). The Line of Credit is not scheduled to expire until February 15, 2012.

The lenders in the syndicate are Bank of America, N.A., Union Bank of California, N.A., Barclays Bank, PLC, JPMorgan Chase Bank, N.A., US
Bank, N.A., Comerica West Incorporation, Fifth Third Bank, and Citibank, N.A. To date, all of the banks in the syndicate have continued to meet their commitments under the

Line of Credit despite the recent turmoil in the financial markets. If any of the banks in the syndicate were unable to perform on their commitments to fund the Line of Credit, the Companys
liquidity would be impaired, unless the Company were able to find a replacement source of funding under the Line of Credit or from other sources.

The Line of Credit provides for revolving loans of up to $250.0 million, although actual borrowing availability can be effectively
limited by the financial covenants contained therein. The financial covenants are tested as of the end of a fiscal quarter (i.e. on March 31, June 30, September 30, and December 31, each year). So long as the Company is
in compliance with the financial covenants on each of those four days, the Company has access to the full $250.0 million (subject to compliance with the other terms of the Line of Credit).

The financial covenants include a consolidated leverage ratio covenant and an interest coverage ratio covenant, both of which are based
in part upon the Companys trailing four quarters earnings before interest, income taxes, depreciation and amortization, as well as other non-cash expense and income items as defined in the agreement governing the Line of Credit
(adjusted EBITDA). The consolidated leverage ratio provides that as of the end of the quarter the Companys Consolidated Funded Indebtedness (as defined in the Line of Credit) may not exceed 2.75 times the Companys adjusted
EBITDA for the previous four quarters then ended. The interest coverage ratio covenant provides that the Companys adjusted EBITDA for the previous four quarters then ended must be at least 3.50 times the Companys Consolidated Interest
Charges (as defined in the Line of Credit) for such period. Many factors, including unfavorable economic conditions and unfavorable foreign currency exchange rates, can have a significant adverse effect upon the Companys adjusted EBITDA and
therefore compliance with these financial covenants. If the Company were not in compliance with the financial covenants under the Line of Credit, it would not be able to borrow funds under the Line of Credit and its liquidity would be significantly
affected.

Based on the Companys consolidated leverage ratio covenant and adjusted EBITDA for the four quarters ended
March 31, 2010, the maximum amount of Consolidated Funded Indebtedness, including borrowings under the Line of Credit, that could have been outstanding on March 31, 2010, was $109.9 million. As of March 31, 2010, the Company had $31.0
million outstanding under the Line of Credit and had $41.9 million of cash and cash equivalents. As of March 31, 2010, the Company remained in compliance with the consolidated leverage ratio as well as with the interest coverage ratio
covenants. Because the Company remained in compliance within these financial covenants, as of April 1, 2010, the Company had full access to the full $250.0 million under the Line of Credit.

In addition to these financial covenants, the Line of Credit includes certain other restrictions, including restrictions limiting
dividends, stock repurchases, capital expenditures and asset sales. As of March 31, 2010, the Company was in compliance with these restrictions and the other terms of the Line of Credit.

Under the Line of Credit, the Company is required to pay certain fees, including an unused commitment fee of between 10.0 to 25.0 basis
points per annum of the unused commitment amount, with the exact amount determined based upon the Companys consolidated leverage ratio. Outstanding borrowings under the Line of Credit accrue interest, at the Companys election, based upon
the Companys consolidated leverage ratio, at (i) the higher of (a) the Federal Funds Rate plus 50.0 basis points or (b) Bank of Americas prime rate, or (ii) the Eurodollar Rate (as defined in the agreement governing
the Line of Credit) plus a margin of 50.0 to 125.0 basis points.

The total origination fees incurred in connection with the
Line of Credit, including fees incurred in connection with the amendments to the Line of Credit, were $2.2 million and are being amortized into interest expense over the remaining term of the Line of Credit agreement. Unamortized origination fees
were $0.5 million as of March 31, 2010, of which $0.3 million was included in other current assets and $0.2 million in other long-term assets in the accompanying consolidated condensed balance sheet.

On June 15, 2009, the Company sold 1.4 million shares of 7.50% Series B Cumulative Perpetual Convertible Preferred Stock, $0.01
par value (the preferred stock). The Company received gross proceeds of

$140.0 million and incurred costs of $6.0 million. The terms of the preferred stock provide for a liquidation preference of $100 per share and cumulative dividends from the date of original issue
at a rate of 7.50% per annum (equal to an annual rate of $7.50 per share), subject to adjustment in certain circumstances. Dividends on the preferred stock are payable quarterly in arrears subject to declaration by the Board of Directors and
compliance with the Companys line of credit and applicable law.

The preferred stock is convertible at any time at the
holders option into Common Stock of the Company at an initial conversion rate of 14.1844 shares of Callaways Common Stock per share of preferred stock, which is equivalent to an initial conversion price of approximately $7.05 per share.

Other Significant Cash and Contractual Obligations

The following table summarizes certain significant cash obligations as of March 31, 2010 that will affect the Companys future
liquidity (in millions):

Payments Due By Period

Total

Less than1 Year

1-3 Years

4-5 Years

More than5 Years

Unconditional purchase
obligations(1)

$

115.0

$

54.6

$

45.3

$

15.1

$



Operating
leases(2)

27.3

8.9

11.1

3.4

3.9

Uncertain tax
contingencies(3)

11.4

1.3

0.2

5.6

4.3

Deferred
compensation(4)

3.0

3.0







Total

$

156.7

$

67.8

$

56.6

$

24.1

$

8.2

(1)

During the normal course of its business, the Company enters into agreements to purchase goods and services, including purchase commitments for production materials,
endorsement agreements with professional golfers and other endorsers, employment and consulting agreements, and intellectual property licensing agreements pursuant to which the Company is required to pay royalty fees. It is not possible to determine
the amounts the Company will ultimately be required to pay under these agreements as they are subject to many variables including performance-based bonuses, reductions in payment obligations if designated minimum performance criteria are not
achieved, and severance arrangements. The amounts listed approximate minimum purchase obligations, base compensation, and guaranteed minimum royalty payments the Company is obligated to pay under these agreements. The actual amounts paid under some
of these agreements may be higher or lower than the amounts included. In the aggregate, the actual amount paid under these obligations is likely to be higher than the amounts listed as a result of the variable nature of these obligations. In
addition, the Company also enters into unconditional purchase obligations with various vendors and suppliers of goods and services in the normal course of operations through purchase orders or other documentation or that are undocumented except for
an invoice. Such unconditional purchase obligations are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item.

(2)

The Company leases certain warehouse, distribution and office facilities, vehicles and office equipment under operating leases. The amounts presented in this line item
represent commitments for minimum lease payments under noncancelable operating leases.

(3)

Amount represents total uncertain income tax positions related to the adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 740. For
further discussion see Note 4 to the Consolidated Condensed Financial StatementsIncome Taxes in this Form 10-Q.

(4)

The Company has an unfunded, nonqualified deferred compensation plan that is backed by Company-owned life insurance policies. As of October 1, 2009, the Company
announced the termination of the plan. In December 2009, a portion of the plan assets were liquidated and distributed to its participants. The remaining plan assets will be liquidated and distributed in October, 2010. The plan had been offered to
its officers, certain other employees and directors, and allowed participants to defer all or part of their compensation, to be paid to the participants or their designated beneficiaries upon retirement, death or separation from the Company. At
March 31, 2010, the cash surrender value of the Company-owned life insurance related to deferred compensation was $3.7 million and was included in other current assets. The liability for the deferred compensation at March 31, 2010 was $3.0
million and was included in accrued employee compensation and benefits.

During its normal course of business, the Company has made certain indemnities, commitments
and guarantees under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Companys customers and licensees in connection with the use, sale and/or
license of Company products or trademarks, (ii) indemnities to various lessors in connection with facility leases for certain claims arising from such facilities or leases, (iii) indemnities to vendors and service providers pertaining to
the goods or services provided to the Company or based on the negligence or willful misconduct of the Company and (iv) indemnities involving the accuracy of representations and warranties in certain contracts. In addition, the Company has made
contractual commitments to each of its officers and certain other employees providing for severance payments upon the termination of employment. The Company also has consulting agreements that provide for payment of nominal fees upon the issuance of
patents and/or the commercialization of research results. The Company has also issued guarantees in the form of two standby letters of credit as security for contingent liabilities under certain workers compensation insurance policies and as
collateral for a loan issued to Golf Entertainment International Limited (see Note 7 Investments to the Consolidated Condensed Financial Statements). In addition, in connection with the uPlay acquisition in December 2008, the Company
could be required to pay an additional purchase price of up to $10.0 million based on a percentage of earnings generated from the sale of uPlay products over a period of three years ending on December 31, 2011. The duration of these
indemnities, commitments and guarantees varies, and in certain cases may be indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the maximum amount of future payments the Company could be
obligated to make. Historically, costs incurred to settle claims related to indemnities have not been material to the Companys financial position, results of operations or cash flows. In addition, the Company believes the likelihood is remote
that payments under the commitments and guarantees described above will have a material effect on the Companys financial condition. The fair value of indemnities, commitments and guarantees that the Company issued during the three months ended
March 31, 2010 was not material to the Companys financial position, results of operations or cash flows.

In
addition to the contractual obligations listed above, the Companys liquidity could also be adversely affected by an unfavorable outcome with respect to claims and litigation that the Company is subject to from time to time. See Note 10
Commitments and Contingencies to the Notes to Consolidated Condensed Financial Statements and Legal Proceedings in Item 1 of Part II in this Form 10-Q.

Sufficiency of Liquidity

Based upon its current operating plan, analysis of its consolidated financial position and projected future results of operations, the
Company believes that its operating cash flows, together with its current or future financing facilities, will be sufficient to finance current operating requirements, required capital expenditures, contractual obligations and commercial
commitments, for at least the next 12 months. There can be no assurance, however, that future industry-specific or other developments (including noncompliance with the financial covenants under its Line of Credit), general economic trends, foreign
currency exchange rates, or other matters will not adversely affect the Companys operations or its ability to meet its future cash requirements (see above, Sources of Liquidity.)

Capital Resources

The Company does not currently have any material commitments for capital expenditures. The Company expects to have capital expenditures of
approximately $30.0 million to $35.0 million for the year ended December 31, 2010.

Off-Balance Sheet Arrangements

During the fourth quarter of 2006, the Company made an investment in Golf Entertainment International Limited
(GEI), the owner and operator of TopGolf entertainment centers. In connection with this investment, the Company acquired Preferred Shares of GEI for approximately $10.0 million. The Company accounts for this

investment under the cost method in accordance with ASC Topic 325,  InvestmentsOther and reflected the investment balance in other long-term assets in the consolidated
condensed balance sheet as of March 31, 2010 and December 31, 2009 included in this Form 10-Q. In February 2008, the Company and another GEI shareholder entered into an arrangement to provide collateral in the form of a letter of credit in
the amount of $8.0 million for a loan that was issued to a subsidiary of GEI. The terms of this letter of credit were extended through April 30, 2010. In April 2010, GEI negotiated a new loan with a different lender and used the proceeds from
this loan to settle the former loan. In connection with this new loan, the Company entered into a new letter of credit arrangement to provide collateral up to $8.0 million. The prior letter of credit was terminated in April 2010.

In addition, at March 31, 2010, the Company had total outstanding commitments on non-cancelable operating leases of approximately
$27.3 million related to certain warehouse, distribution and office facilities, vehicles as well as office equipment. Lease terms range from 1 to 8 years expiring at various dates through November 2017, with options to renew at varying terms.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K for the fiscal year ended December 31, 2009.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

The Company uses derivative financial instruments for hedging purposes to limit its exposure to changes in foreign currency exchange
rates. Transactions involving these financial instruments are with creditworthy firms. The use of these instruments exposes the Company to market and credit risk which may at times be concentrated with certain counterparties, although counterparty
nonperformance is not anticipated. The Company is also exposed to interest rate risk from its credit facility.

Foreign Currency
Fluctuations

In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in
foreign currency exchange rates relating to transactions of its international subsidiaries, including certain balance sheet exposures (payables and receivables denominated in foreign currencies) (see Note 13 Derivatives and Hedging to
the Notes to Consolidated Financial Statements). In addition, the Company is exposed to gains and losses resulting from the translation of the operating results of the Companys international subsidiaries into U.S. dollars for financial
reporting purposes. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses derivative financial instruments in the form of foreign currency forward contracts and put
and call option contracts (foreign currency exchange contracts) to hedge transactions that are denominated primarily in British Pounds, Euros, Japanese Yen, Canadian Dollars, Australian Dollars and Korean Won. For most currencies, the
Company is a net receiver of foreign currencies and, therefore, benefits from a weaker U.S. dollar and is adversely affected by a stronger U.S. dollar relative to those foreign currencies in which the Company transacts significant amounts of
business.

Foreign currency exchange contracts are used only to meet the Companys objectives of offsetting gains and
losses from foreign currency exchange exposures with gains and losses from the contracts used to hedge them in order to reduce volatility of earnings. The extent to which the Companys hedging activities mitigate the effects of changes in
foreign currency exchange rates varies based upon many factors, including the amount of transactions being hedged. The Company generally only hedges a limited portion of its international transactions. The Company does not enter into foreign
currency exchange contracts for speculative purposes. Foreign currency exchange contracts generally mature within twelve months from their inception.

The Company does not designate foreign currency exchange contracts as derivatives that
qualify for hedge accounting under ASC 815, Derivatives and Hedging. As such, changes in the fair value of the contracts are recognized in earnings in the period of change. At March 31, 2010 and 2009, the notional amounts of the
Companys foreign currency exchange contracts used to hedge the exposures discussed above were approximately $168.8 million and $138.6 million, respectively. At March 31, 2010 and 2009, there were no outstanding foreign exchange contracts
designated as cash flow hedges for anticipated sales denominated in foreign currencies.

As part of the Companys risk
management procedure, a sensitivity analysis model is used to measure the potential loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest rates or foreign currency values. The
sensitivity analysis model quantifies the estimated potential effect of unfavorable movements of 10% in foreign currencies to which the Company was exposed at March 31, 2010 through its foreign currency exchange contracts.

The estimated maximum one-day loss from the Companys foreign currency exchange contracts, calculated using the sensitivity analysis
model described above, is $18.7 million at March 31, 2010. The portion of the estimated loss associated with foreign currency exchange contracts that offset the remeasurement gain and loss of the related foreign currency denominated assets and
liabilities is $18.7 million at March 31, 2010 and would impact earnings. The Company believes that such a hypothetical loss from its foreign currency exchange contracts would be partially offset by increases in the value of the underlying
transactions being hedged.

The sensitivity analysis model is a risk analysis tool and does not purport to represent actual
losses in earnings that will be incurred by the Company, nor does it consider the potential effect of favorable changes in market rates. It also does not represent the maximum possible loss that may occur. Actual future gains and losses will differ
from those estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge percentages, timing and other factors.

Interest Rate Fluctuations

The Company is exposed to interest rate risk from its Line of Credit (see Note 9 to the Companys Consolidated Condensed Financial
Statements in this Form 10-Q). Outstanding borrowings under the Line of Credit accrue interest, at the Companys election, based upon the Companys consolidated leverage ratio and trailing four quarters EBITDA, of (i) the higher
of (a) the Federal Funds Rate plus 50.0 basis points or (b) Bank of Americas prime rate, or (ii) the Eurodollar Rate (as defined in the agreement governing the Line of Credit) plus a margin of 50.0 to 125.0 basis points.

As part of the Companys risk management procedures, a sensitivity analysis was performed to determine the impact of
unfavorable changes in interest rates on the Companys cash flows. The sensitivity analysis quantified that the estimated potential cash flows impact would be approximately $0.1 million in additional interest expense if interest rates were to
increase by 10% over a three month period.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures. The Company carried out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of March 31, 2010, of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting. During the quarter ended March 31, 2010, there were no changes in the
Companys internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

Because of the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The information set forth in Note 10 Commitments and Contingencies, to the consolidated condensed financial statements
included in Part I, Item 1, of this Quarterly Report, is incorporated herein by this reference.

Item 1A.

Risk Factors

Certain
Factors Affecting Callaway Golf Company

The Company has included in Part I, Item 1A of its Annual Report on Form 10-K
for the year ended December 31, 2009, a description of certain risks and uncertainties that could affect the Companys business, future performance or financial condition (the Risk Factors). There are no material changes from
the disclosure provided in the Form 10-K for the year ended December 31, 2009 with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to the Companys stock.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Stock Purchases:

In November 2007, the Board of Directors authorized a repurchase program (the November 2007 repurchase program) for the
Company to repurchase shares of its common stock up to a maximum cost to the Company of $100.0 million, which will remain in effect until completed or otherwise terminated by the Board of Directors.

During the three months ended March 31, 2010, the Company repurchased 82,000 shares of its common stock at an average cost per share
of $8.40 under the November 2007 repurchase program. The Company received these shares to settle taxes paid on behalf of holders of Restricted Stock Units. As of March 31, 2010, the Company remained authorized to repurchase up to an additional
$75.2 million of its common stock under this program.

The following table summarizes the purchases by the Company under its
repurchase programs during the first quarter of 2010 (in thousands, except per share data):

Certificate of Incorporation, incorporated herein by this reference to Exhibit 3.1 to the Companys Current Report on Form 8-K, as filed with the Commission on July 1,
1999 (file no. 1-10962).

3.2

Certificate of Designation for 7.50% Series B Cumulative Perpetual Convertible Preferred Stock, incorporated herein by this reference to Exhibit 3.1 to the Companys Current
Report on Form 8-K, as filed with the Commission on June 15, 2009 (file no. 1-10962).

3.3

Fifth Amended and Restated Bylaws, as amended and restated as of November 18, 2008, incorporated herein by this reference to Exhibit 3.1 to the Companys Current Report on Form
8-K, as filed with the Commission on November 21, 2008 (file no. 1-10962).

3.4

Amended and Restated Certificate of Designation for 7.50% Series B Cumulative Perpetual Convertible Preferred Stock, incorporated herein by this reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K, as filed with the Commission on March 5, 2010 (file no. 1-10962).

4.1

Form of Specimen Stock Certificate for Common Stock, incorporated herein by this reference to Exhibit 4.1 to the Companys Current Report on Form 8-K, as filed with the
Commission on June 15, 2009 (file no. 1-10962).

4.2

Form of Specimen Stock Certificate for 7.50% Series B Cumulative Perpetual Convertible Preferred Stock, incorporated herein by this reference to Exhibit 4.2 to the Companys
Current Report on Form 8-K, as filed with the Commission on June 15, 2009 (file no. 1-10962).

4.3

Dividend Reinvestment and Stock Purchase Plan, incorporated herein by this reference to the Prospectus in the Companys Registration Statement on Form S-3, as filed with the
Commission on March 29, 1994 (file no. 33-77024).

4.4

Registration Rights Agreement, dated June 15, 2009, between the Company and Lazard Capital Markets LLC, incorporated herein by reference to Exhibit 4.7 to the Companys
Registration Statement on Form S-3, as filed with the Commission on September 10, 2009 (file no. 333-161848).

10.1

Non-Employee Director Restricted Stock Unit Grant Agreement, incorporated herein by this reference to Exhibit 10.58 to the Companys Current Report on Form 8-K, as filed with
the Commission on January 28, 2010 (file no. 1-10962).

10.2

2010 Senior Management Incentive Program, incorporated herein by this reference to Exhibit 10.59 to the Companys Current Report on Form 8-K, as filed with the Commission on
January 28, 2010 (file no. 1-10962).

10.35

Indemnification Agreement, dated January 25, 2010 between the Company and Adebayo O. Ogunlesi incorporated herein by reference to Exhibit 10.35 to the Companys Annual Report
on Form 10-K, as filed with the Commission on January 26, 2010 (file no. 1-10962).

31.1

Certification of George Fellows pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Bradley J. Holiday pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of George Fellows and Bradley J. Holiday pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.

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